CLIMATESMART

CITIES

CATALYZING PRIVATE SECTOR INVESTMENT IN

INVEST4CLIMATE KNOWLEDGE SERIES

Empowered lives. Resilient nations. A World Bank Group, United Nations Development Programme and Global Infrastructure Facility Report

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Attribution—Please cite the work as follows: Lauren Carter, Sandrine Boukerche. 2020. Catalyzing Private Sector Investment In Climate-Smart Cities. Invest4Climate Knowledge Series. Washington, DC:

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TABLE OF

CONTENT

Acknowledgements .................................................................................................................................2

Abbreviations ...........................................................................................................................................2

01 | Overview ........................................................................................................................ 4

02 | Challenge and Opportunity ..............................................................................................8

03 | Climate-Smart Cities ...................................................................................................... 12Urban GHG Mitigation and Leveraging Private Investment ........................................................ 13

Urban Adaptation and Resilience .................................................................................................. 18

Private Sector Investment in Urban Resilience ............................................................................20

04 | Barriers to Expanding Climate-Smart Urban Investment ................................................26Traditional Investment Barriers .................................................................................................... 27

Climate Investment Barriers .........................................................................................................35

05 | Case Studies: Crowding-In Private Urban Investment .................................................... 40Case Study 1: Bundling Urban Climate Investment Opportunities in a Dedicated Fund

to Crowd-in Institutional Investors ...............................................................................................42

Case Study 2: Directing Private Investment for Mitigation in Cities through

Comprehensive Urban Spatial Planning and Design ................................................................... 44

Case Study 3: Expanding Urban Investment through Policy Risk-Reduction ............................45

Case Study 4: Combating Climate Change and Pollution through Municipal Bonds .................47

Case Study 5: Leveraging Green Urban Private Investment through

Blended Finance Mechanisms ...................................................................................................... 49

Case Study 6: Unlocking Viable Investment Pipelines for Resilience ........................................ 50

Case Study 7: Reducing Transaction Costs through Green Bulk Procurement of Electric Buses

in Santiago Chile .............................................................................................................................52

Case Study 8: Trailblazing Investment in Urban Vertical Farming Technology ..........................54

Case Study 9: Developing Natural Capital Insurance Products for Urban Coastal Resilience ....56

Case Study 10: Building Software Planning Tools for Cities ........................................................59

06 | Conclusion .....................................................................................................................62Challenge and Opportunity ............................................................................................................62

Importance of Enabling Environment ..........................................................................................63

Importance of Innovative Financial Structures ........................................................................... 64

Call to action ................................................................................................................................. 64

References ..............................................................................................................................................66

Appendix 1: Invest4Climate ................................................................................................................. 68

Appendix 2: Sample Menu of Options for Urban Resilience Investments ..........................................69

Appendix 3: Key Financial Regulations and Their Effect on Institutional Investor Segments

in the United States, European Union, and United Kingdom .............................................................70

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Acknowledgements

This report was prepared under the auspices of the Invest4Climate platform co-launched by the World Bank Group and United Nations Development Programme (UNDP). It is a collaborative effort of UNDP, the World Bank, the International Finance Corporation (IFC), and the Global Infrastructure Facility. Lauren Carter, Engagement Advisor, Invest4Climate UNDP, and Sandrine Boukerche, Climate Change Specialist, Invest4Climate World Bank, authored the report, with contributions from team members Jan Kellett, Special Advisor, Finance Sector Hub, UNDP; Lori Kerr, Senior Infrastructure Finance Specialist, Global Infrastructure Facility; Shari Friedman, Senior Operations Officer, IFC; Don Purka, Principal Investment Officer IFC; Peter Ellis, Lead Urban Economist, World Bank, and Michael

Grimm, Senior Financial Specialist, World Bank. The authors would like to thank the following colleagues and experts who provided valuable feedback during the peer review process: Lisa Da Silva, Principal Investment Officer, IFC; Stephen Hammer, Advisor, Climate Change Group World Bank; Horacio Terazza, Lead Urban Specialist, World Bank; Jaffer Machano, Global Program Manager, Municipal Investment Finance, UNCDF; Laura Hammett, Climate Change Adaptation and Urban Programming Specialist, UNDP, and Tenke Zoltani, Development Finance Advisor, UNDP. UNDP also acknowledges the financial support to Invest4Climate provided by the Government of Germany and the Government of Italy. The report was edited by Donna Barne, External Affairs Officer, World Bank and designed by Phoenix Design.

Abbreviations

BBB Breathe Better Bond

CCA Community Choice Aggregation

CRP City Resilience Program

FSC Financing and Service Company

GDP Gross Domestic Product

GHG Greenhouse Gas

IFC International Finance Corporation

IMIF International Municipal Investment Fund

IPCC Intergovernmental Panel on Climate Change

KfW Kreditanstalt für Wiederaufbau (German Development Bank)

NDC Nationally Determined Contribution

PACE Property-Assessed Clean Energy

PPP Public-Private Partnership

UNCDF United Nations Capital Development Fund

UNDP United Nations Development Programme

Note: All dollar amounts are U.S. dollars unless otherwise indicated.

The Invest4Climate platform, a World Bank Group–United Nations Development Programme (UNDP) partnership,

was designed to mobilize, coordinate, and deliver the financing needed to close the climate financing gap and help

countries transition to a low carbon, resilient future that supports jobs and growth. For more information, see

https://www.worldbank.org/invest4climate. The Invest4Climate Knowledge Series provides targeted reports on

expanding private investment in climate action through financial innovation and collaborative partnerships.

https://www.worldbank.org/invest4climate

01

OVERVIEW

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Cites are both a cause and a victim of climate change and have important reasons for addressing it. While achieving the goals of the Paris Climate Agreement rests on many factors, much depends on what happens in cities. Cities account for 55 percent of the world’s population and 80 percent of global gross domestic product (GDP). Their rapid and often haphazard growth has been a driver of climate change. Today, cities account for 70 percent of the world’s greenhouse gas (GHG) emissions. They face unmanageable air pollution, traffic congestion, and waste accumulation. Their energy demands are increasing along with their vulnerability to disasters and climate shocks such as heat stress, flooding, and health emergencies. These challenges put increasing pressure on critical urban infrastructure and services, city livability, and business continuity and can impact city competitiveness in the future if not addressed today.

By becoming climate-smart, cities can avoid locking-in to high-emissions and vulnerable pathways while enhancing future attractiveness and competitiveness. As the world’s population becomes increasingly urban, it is critical that cities invest in physical infrastructure and natural capital solutions that will enable them to reduce their emissions and increase their resilience to climate change and other shocks and stresses. A climate-smart city minimizes environmental damage, reduces air pollution and GHG emissions, and maximizes opportunities to enhance urban resilience, thereby improving the natural environment and overall livability and appeal of the city. Efforts to address climate change in urban areas through investments to enhance air quality, the circular economy, green buildings, green spaces as well as compact, optimal densification and urban form, add to quality of life which in turn attracts talent and businesses and increases the competitive edge of a city. Green investments can also help lower the cost of living and help attract or retain talent in urban centers.

The private sector has an important role to play and its perception of climate investment is changing, particularly in cities. The investment potential of climate-smart urban infrastructure is substantial. Some $29.4 trillion in opportunities exist in developing countries alone across six urban sectors that reduce emissions: renewable energy, public transportation, climate-smart water, electric vehicles, and green buildings (IFC 2017). Climate resilience also presents significant private investment opportunities as climate change becomes an increasingly powerful macroeconomic trend impacting the real economy. As the climate change crisis gets bigger, better understood by markets, and better priced, so will the value, importance and return of companies and assets that are intrinsically resilient or provide resilience solutions. According to a recent survey of the world’s biggest companies, climate adaptation products and solutions could result in $236 billion in increased revenue (GCA 2019).

Despite the investment potential, cities face unique challenges in accessing finance to fill the climate-smart investment gap. The global need for urban infrastructure investment is estimated at $4.5 trillion to $5.4 trillion per year, with current levels of financing only reaching $2.5 to $3 trillion annually (CCFLA 2015). Infrastructure needs are particularly acute in rapidly growing cities in Africa and South Asia. Many of the barriers cities face in attracting private investment are rooted in their limited control over broader enabling environmental conditions, such as national policies and regulations, as well as limited institutional capacity to plan and design climate-aligned investment opportunities for the private sector (C40 and ODI 2019). Globally, cities vary widely in their ability to borrow money. Only 5 percent of the 500 largest cities in developing countries have a credit rating on international capital markets and only 20 percent have a credit rating in local markets (World Bank 2018). In addition, 56 percent of countries forbid any kind of borrowing by local governments, excluding them from issuing bonds, and only 16 percent grant any taxation authority to local governments.

01 | Overview

5

Catalyzing private sector investments in climate smart cities

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Chapter 1 | Overview

Private investors face their own challenges investing in urban climate projects. The risks associated with emerging markets and developing countries are still present in cities. These include political risks, such as breach of contract, currency convertibility and expropriation of assets, and macroeconomic risks, such as currency fluctuation and inflation. At the urban level, investors are often less familiar with municipal governments and their financial conditions and finding a pipeline of sufficient size and quality can be difficult.

Significantly more must be done to support cities and subnational governments in their efforts to achieve low carbon, resilient development. There is no single solution to overcoming the complex, multifaceted barriers that cities face in financing climate change projects, particularly given the need for large, complex, cross-sectoral investments. Turning main sources of GHGs in urban areas into opportunities for green growth and creating livable cities requires integrated systems approaches and coordination with national government agencies. The scale and complexity of the investment needed will require enhanced technical capacity of people and systems in local municipal markets, national governments, and the private sector. This report outlines a number of innovative financing approaches and instruments that can increase critical climate investment in cities and help uphold the global commitment to keep global warming to less than 1.5°C.

The objective of this report is to explore innovative financing instruments and approaches for catalyzing private sector financing to fill the climate-smart investment gap in cities. The report reviews the existing literature, highlights key barriers in scaling-up private investment in climate-smart urban infrastructure, and showcases innovative financial de-risking instruments and other financial instruments for private sector financing for low carbon, resilient urban investments. The first chapter of the report introduces the topic and the second presents the challenges and the opportunities of urban climate investments. The third chapter discusses climate-smart cities and types of urban mitigation and resilience investments. The fourth chapter reviews and provides a framework to examine the interconnected layers of investment barriers specific to private investment, city financing, and climate-smart projects. Considering these risks allows investors and other stakeholders to better understand the complex web of challenges to expanding investment in urban climate projects and how they build on one another. Chapter five presents 10 case studies of innovative financing approaches to address some of these barriers and mobilize private sector finance for low carbon, resilient urban development. Finally, the conclusion in chapter six offers some key findings and considerations for the wider community of practice.

02

CHALLENGEAND

OPPORTUNITY

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The ability to reach the Paris Climate Agreement goals rests on many factors, but much depends on what happens in cities and on mobilizing private resources. Cities currently account for 55 percent of the global population. Their share is projected to increase to 75 percent by 2050 as a result of rapid urbanization and demographic trends, with significant effects on climate change mitigation and adaptation efforts. The Inter-Governmental Panel on Climate Change (IPCC) reports that cities’ ability to address climate change is critical to limiting global warming to 1.5° Celcius. The IPCC identifies urban and infrastructure systems as one of four key systems with the opportunity for transformational change toward a low-carbon, resilient global economy (IPCC 2018).

The magnitude of the investment needed to strategically plan for, build, and retrofit climate-smart infrastructure far exceeds public balance sheets. Leveraging private sector investment, innovation and know-how will be critical to delivering climate-smart infrastructure and services by 2030. Although numbers vary depending on the methodology used, the message is clear: The investment gap in sustainable urban infrastructure is estimated to be in the trillions annually and is particularly acute in emerging markets and developing economies.1 According to the Cities Climate Finance Leadership Alliance, the global need for urban infrastructure investment is $4.5 trillion to $5.4 trillion per year with current levels of financing only reaching $2.5 to $3 trillion annually (CCFLA 2015). The need for infrastructure is particularly acute in rapidly growing cities within fast urbanizing developing countries in Africa and South Asia.

1 The 2015 CCFLA State of City Climate Finance report identifies $93 trillion of low-carbon, climate-resilient infrastructure needed by 2030, of which 70 percent will need to be built in urban areas.

2 The heat island effect is when built-up areas are hotter than nearby rural areas. The annual mean air temperature of a city with 1 million people can be 1°C to 3°C warmer than its surroundings. In the evening, the difference can be as much as 12°C. Heat islands can affect communities by increasing summertime peak energy demand, air conditioning costs, air pollution and GHG emissions, heat-related illness and mortality, and water pollution. See https://www.epa.gov/heat-islands

Cities are key drivers of climate change. They consume two thirds of global energy and account for more than 70 percent of global GHG emissions, with some of this being within their control and as a result of their policies and much of it not. Air pollution from traffic congestion or industry in cities such as black carbon, sulfates and nitrates have heavy implications for human health, increasing the risk of stroke, heart disease, lung cancer, and respiratory diseases. The World Health Organization recently reported that 7 million people die each year due to air pollution and some analysis shows life expectancy dropping by 4.3 years in some cities (Air Quality Life Index). This is particularly acute in developing countries.

Cities are very vulnerable to climate change shocks, especially in poorer countries. Cities increasingly concentrate people, assets and poverty. Rapid and unplanned growth is leading to urban sprawl, often onto low lying and vulnerable urban lands. Urban populations are already increasingly experiencing heat island effects,2 rising sea levels, storm surges, and intensifying tropical storms (WBG 2019a) which could force hundreds of millions of people in coastal cities from their homes with a total cost to coastal urban areas of more than $1 trillion per year by 2050 (GCA 2019). Climate change related losses can significantly drain public investment especially in poorer countries and could push an additional 100 million urban residents back into poverty by 2030. Cities are places in which the risks associated with warming to 1.5°C, such as heat stress, terrestrial and coastal flooding, new disease vectors, air pollution and water scarcity, will coalesce (Dodman et al. 2017a; Satterthwaite and Bartlett 2017; IPCC Report 2019).

02 | Challenge and Opportunity

https://www.epa.gov/heat-islands

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Catalyzing private sector investments in climate smart cities

Climate change is also a leading factor in the rapid urbanization in emerging markets and developing countries which has placed significant strain on long-term strategic and spatial urban planning. In Sub-Saharan Africa, extreme temperatures and unpredictable rainfall have already affected income from agriculture and caused people to migrate from rural to urban areas. Agricultural yields are expected to face losses of up to 15 percent by 2050, signaling that further rural-to-urban migration in the coming decades is likely, along with the associated pressures on urban infrastructure and services (IFC 2017). More than 60 percent of the land projected to become urban by 2030 has yet to be developed (GCEC 2018) and smaller cities are growing faster than megacities, especially in South Asia and Africa. Lack of strategic and spatial urban planning could lock in inefficient, poorly designed and vulnerable urban infrastructure for decades to come.

Climate change, along with other factors, may have future impacts on city competitiveness. Low carbon, resilient urban development pathways will be critical for creating attractive and livable cities that offer healthy and active lifestyles; clean air, green spaces, well managed waste and energy services, comfortable commutes and access to safe, resilient and green buildings.

3 As defined by the World Green Building Council, a ‘green’ building is a building that, in its design, construction or operation, reduces or eliminates negative impacts, and can create positive impacts, on our climate and natural environment. Green buildings preserve precious natural resources and improve our quality of life. See https://www.worldgbc.org/what-green-building

Investments in green infrastructure raise quality of life, which in turn, attracts talent and businesses. Green buildings3 can also lower the cost of living and help attract or retain talent in urban centers. Investing in resilience reduces costs to rebuild or repair; low carbon infrastructure planning and investments enhance energy efficiency and cost effectiveness, which can also help build resilience to financial shocks. On the other hand, not investing in climate smart urban infrastructure may have the opposite effect of future lost competitiveness and reverse urbanization, in some cases. Already today many large cities such as New York City, Chicago, Los Angeles, London and Paris, are beginning to see reverse urbanization due to the impacts of climate change or the problems that cause it such as pollution, congestion and inefficient housing.

The investment potential of climate-smart urban infrastructure is substantial. The anticipated growth in urban populations will require massive investment in climate-smart urban infrastructure, including energy efficiency, renewable energy sources for electricity, public transport and e-vehicle charging, water resources, and waste management. The Climate Investment Opportunities in Cities report identified $29.4 trillion of investment opportunities in developing countries across six urban sectors (renewable energy, public transportation, climate-smart water, electric vehicles, and green buildings)(IFC 2017). Realizing the investment potential of cities will require a focus on integrated urban planning and city spatial plans that promote low-carbon, compact urban development. The COVID 19 pandemic and crisis has exposed systemic vulnerabilities in urban areas and the importance of urban planning in achieving well-planned, optimized and well-managed urban density and form (Lall and Wahba 2020).

Cities are places in which the risks associated with warming of 1.5°C, such as heat stress, terrestrial and coastal flooding, new disease vectors, air pollution and water scarcity, will coalesce

https://www.worldgbc.org/what-green-building

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Chapter 2 | Challenge and Opportunity

Investment in urban resilience is important for the economy, for competitivity and for business at the local, national, and global level. Cities produce more than 80 percent of global gross domestic product (GDP) and are the economic powerhouses of most countries as they concentrate people, businesses, jobs and tax revenue, and provide goods and services (UNEP 2019; IFC 2017). However, climate- and disaster-related shocks can disrupt supply chains, essential services, and livelihoods. Climate change can also lead to health risks due to vector-borne diseases, extreme heat, pollution, as well as loss of productivity and an increase in unexpected expenses resulting from the need to repair or rebuild physical assets (IFC 2017). Upfront resilience and prevention have been found to have an economic return of $4 for each dollar invested (WBG 2019b). It is estimated across 279 cities that increasing urban resilience could protect as much as $73.4 billion a year of GDP from climate change risks (Lloyds 2018).

In spite of their investment potential, cities have unique challenges accessing finance and they need innovative approaches to leverage and attract private sector financing to fill the climate-smart investment gap. In general, cities rely primarily on reallocating existing municipal budgets or

channeling tax revenue to fund investments and operating budgets for climate-smart infrastructure and services. However, the ability to mobilize private investment is shaped by the size, sophistication and institutional capacity of a city, which can vary widely even within the same country. Cities often face such barriers as limited or restricted bonding and taxation authority, low or no credit rating, limited capacity to structure bankable climate projects, and a lack of control over policies and enabling environment conditions that can encourage private investment. The combinations of these barriers in a given context will impact the financing modalities cities can use to attract private capital and at what cost (IFC 2017).

Private investors face their own challenges investing in urban climate projects. The risks associated with emerging markets and developing countries are still present in cities. These include political risks, such as breach of contract, currency convertibility and expropriation of assets, and macroeconomic risks, such as currency fluctuation and inflation. At the urban level, investors are often less familiar with municipal governments and their financial conditions and finding a pipeline of sufficient size and quality can be difficult.

03

CLIMATESMARTCITIES

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Although definitions vary, in general climate-smart cities4 aim to minimize environmental damage, reduce air pollution and GHG emissions, and maximize opportunities to enhance urban resilience, improving the natural environment and overall livability of the city. On both the demand and supply sides, climate-smart cities are energy efficient; reduce reliance on nonrenewable energy sources; actively encourage waste reduction; and promote the circular economy, resilient low-carbon infrastructure, low-carbon transport, water management, green spaces, and nature-based solutions. Climate-smart cities must consider themselves as complex systems with interrelated

4 The term “city” may be defined very differently by region, geographic scope, population size and legal and governing authority and can include terms such as “city, town, district, municipality, local government or metropolitan area.” For the purposes of this report – and its objective to shift investment in an urban environment towards low carbon, resilient infrastructure and catalyze private investment - the term “city” is all encompassing and refers to a heavily dense, non-rural area.

5 Further information available here https://www.epa.gov/greenpower/community-choice-aggregation

dimensions (UNEP and UNISDR 2015; GFDRR 2015): functional (e.g., municipal revenue generation), organizational (e.g., governance and leadership), physical (e.g., infrastructure), and spatial (e.g., urban design). All these interventions require an integrated, systems-based urban and spatial planning framework to improve the quality of life of all residents (IPCC 2019; IEA 2017).

The level of municipal control and tools available for cities to influence and encourage resilient low-carbon public and private investment will vary according to sector, city, and national context, although, in general, a city has five roles to play in low-carbon investment.

1. On the demand side, the city is a consumer of goods and services, with the city and its citizens the end user. In certain instances, the city can act as a powerful demand side influencer, demand aggregator and green bulk procurer. Community Choice Aggregation (CCAs)5 measures for example allow local governments to procure power on behalf of their residents, businesses, and municipal accounts from alternative renewable power sources.

2. The city can act as a regulator that offers incentives through local policies, regulations, standards, and subsidies. Cities can have substantial influence over local and regional policies and legislation that can influence and incentivize investments in carbon mitigation and climate resilience. Incentives could include instituting new tariffs and user fees for infrastructure, changing building codes, issuing business licenses, supporting electric vehicle charging infrastructure, energy efficiency financing for refurbishment (e.g.,

03 | Climate-Smart Cities

Cities are places of human convergence, where people live, work, and play. But beneath the bustle of any city are systems that make these hubs of humanity function. Cities are akin to living things that take in energy, metabolize material, and spit out waste. They consume and grow, using digestive, respiratory, and circulatory systems. And, like living things, cities can, with a nudge from citizens and their leaders, evolve in directions that increase their prospects for survival.

Garner G. 2016 The City: A System of Systems

https://www.epa.gov/greenpower/community-choice-aggregation

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Catalyzing private sector investments in climate smart cities

Property Assessed Clean Energy PACE6) and many other policy initiatives.

3. The city also acts as an investor and provider of goods and services when it has the independent mandate, purview, and financing to do so. Not all sectors fall within the finance purview of cities, especially utility scale energy, industry, and national or international transport.

4. The city mobilizes capital and raises funds from the private sector through financial mechanisms such as corporate taxes, municipal bonds, dedicated municipal trust funds, and public private partnerships (PPPs).

5. The city plays a role as a “system of systems” (Gardner G. 2016). Cities are akin to living things that consume and grow, using digestive, respiratory, and circulatory systems. As such it is important to also frame and consider financing and business models for urban infrastructure systems that deliver reliable, accessible, low carbon and resilient services to urban citizens – whether managed by the city, an operator or a utility. To enhance private capital for climate smart investments it is important to think of system creditworthiness as well as city creditworthiness (World Bank 2018).

Urban GHG Mitigation and Leveraging Private Investment

Reducing global GHG emissions requires transitioning our energy system away from fossil fuels to other forms of energy such as renewables. It entails focusing on energy efficiency, changing how we produce and consume goods, and removing carbon from the atmosphere. With rapid urbanization

6 One innovative financing mechanism used by local governments is to subsidize low-interest loans for homeowners to invest in renewable energy or energy efficiency, which they gradually pay back through slightly higher property taxes. This mechanism underpins the property-assessed clean energy (PACE) financing model used in the United States (PACE). Further information available here: https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs and https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2016/IRENA_Renewable_Energy_in_Cities_2016.pdf

and other challenges such as technology disruptions, disease spread and global financial crises, cities are often in crisis mode, having to simultaneously address major challenges in crucial sectors such as traffic congestion, air pollution, urban sprawl, waste, and lack of reliable energy access. These challenges also constitute some of the main sources of GHG emissions in cities, with some of them within cities’ control and as a result of their policies, and often much of them not.

GHG emissions will vary considerably from city to city, reflecting the structure of a city, its energy sources, and its residents’ lifestyles (WB 2010), but in general come from five sectors: transport, buildings, energy, waste, and industry. To turn the main sources of GHGs in urban areas into opportunities for green growth, job creation, and livable neighborhoods, cities need integrated, systems-based approaches and spatial strategies that national government agencies support and that leverage finance. Similarly, the greatest opportunities for mobilizing private investment to support low-carbon cities include green buildings, urban renewable energy, urban green transport, circular waste, green industry, and urban farming.

Table 1 summarizes the main sources of GHGs in urban areas, potential solutions, and the level of municipal control. This is for illustrative purposes and will vary according to the specific municipal, regional, and national context and may not be an exhaustive list of measures available for cities.

With rapid urbanization, cities are in crisis mode in key sectors that are also the main sources of greenhouse gas emissions

https://www.weforum.org/agenda/2016/12/want-to-protect-the-planet-pursue-personal-happinesshttps://www.energy.gov/eere/slsc/property-assessed-clean-energy-programshttps://www.irena.org/-/media/Files/IRENA/Agency/Publication/2016/IRENA_Renewable_Energy_in_Cities_2016.pdfhttps://www.irena.org/-/media/Files/IRENA/Agency/Publication/2016/IRENA_Renewable_Energy_in_Cities_2016.pdf

14

Chapter 3 | Climate-Smart Cities

Table 1 Main Sources of Greenhouse Gases in Urban Areas, Solutions, and Level of Municipal Control

SOURCES

Transport Buildings Energy Waste Industry

SOLUTIONS An Integrated Transport Plan that plans for compact cities and multimodal, networked,

electrified, active and green transport

systems: walkability, bikability; e-public

transport (BRT, metro, light rail); e-vehicles

(taxis, share-rides, private vehicles). Policy

measures could consider:

– Increasingly stringent emission

standards for existing cars

– Minimum fuel efficiency standards for

new vehicles

– Quotas for cars that can be registered

– High-occupancy vehicle and bus lanes

– Technology disruption, including self-

driving and small flying vehicles.

An Integrated Systems Plan that promotes

compact, green and efficient buildings

and environment through urban form;

centralized district approaches; building

codes; zoning; appliance standards;

Incentives (permitting, subsidies) and green

infrastructure and nature based solutions

such as trees, parks, green roofs, and water

features to reduce urban heat island effect.

Measures could include:

– Energy efficiency financing for

refurbishment (e.g., Property Assessed

Clean Energy PACE)

– Green mortgages for homes

– Energy performance disclosures for

buildings

– Energy performance labels for buildings

(‘A’ to ‘F’)

– Cap-and-trade program for buildings

An Integrated Energy Plan fed by micro grids,

urban grids and centralized utilities, supported

by storage and renewable energy. Measures

could include incentives for:

– Rooftop solar on city-owned, residential and

commercial assets.

– Rooftop solar for slum upgrades and social

housing.

– Solar street lighting

– Community Choice Aggregation (CCAs)

measures that allow local governments to

procure power on behalf of their residents,

businesses, and municipal accounts from

alternative power sources.

A plan to move towards a circular

economy and zero waste concepts

of “reduce, reuse, recycle (materials),

recover (energy) and only then dispose”

for solid waste and for water. This

includes demand-reduction measures

such as:

– Reducing consumer packaging and

extended producer responsibility;

– Bans on single-use materials (e.g.,

plastic bags);

– Encouragement for multiuse,

recyclable, biodegradable materials

– Pay-as-you-throw or landfill tax;

– Investments in composting and

landfill fugitive emissions capture;

– Storm water diversion through

urban design; incentives for

permeable materials, green roofs,

water gardens, and nature-based

solutions for built environment

A plan to reduce final energy demand in

industry by one-third through renewables,

energy efficiency, and green infrastructure

planning. Increase recycling of materials

and the development of a circular economy

in industry. Measures include:

– Shifting to electrification of production

processes where possible;

– Increasing recycling and circular economy

in industry;

– Substituting towards renewable

materials in high-carbon products (e.g.,

wood vs steel or cement in construction

sector, natural textile fibers vs plastics);

– Investments in green technologies such

molten oxide electrolysis powered by

renewables for greening steel; concrete

for carbon sequestration; direct air

capture technologies

MUNICIPAL CONTROL MEDIUM

Regional and national roads, highways,

bridges, ports, trains under purview of

national department of transport.

Cities have purview over urban planning

and form; in city road network, bus rapid

transit, sidewalks, bicycle and pedestrian

infrastructure, in city transit infrastructure

such as metro, tram or light rail; Taxi and

ride-share policy as well as parking fees and

proportion of urban land dedicated to street

parking and cars.

HIGH

Heating, cooling, and cooking equipment

standards and national building codes

typically under a national department such

as energy, housing or environment.

Cities have purview over urban form,

planning, zoning, building codes, district

cooling and heating, permitting, inspection,

and local financial incentives and financing

approaches such as PACE.

LOW

Utilities and grid networks under purview of

national department of energy.

Although some cities may have municipal owned

and managed utilities this is not the norm.

Typically, cities can make independent decisions

for rooftop solar on city-owned public buildings,

social housing, and slum upgrades; incentives

for solar roof top and upgrade street lighting

Community Choice Aggregation (CCAs)

measures are an attractive option for cities that

want more local control over their electricity

sources, more green power than is offered by

the default utility, and/or lower electricity prices.

HIGH

Cities have purview over solid waste

management through urban planning,

land zoning, waste collection,

infrastructure investment for

composting, landfill, waste to energy,

incineration, and demand reduction

measures (see above).

Cities have medium purview over

water supply, wastewater treatment

and recycling, and storm water

diversion, such as through urban

design and incentives for permeable

materials, green roofs, water gardens

and nature-based solutions for built

environment.

LOW

Industries located within cities must follow

national environmental policies and safety

standards. Trade-sensitive industrial

sectors such as iron, petrochemicals,

and fossil fuels make policy action by

individual cities challenging because of

competitiveness concerns.

Cities have some limited levers of

influence on industry through land zoning,

permitting, and local taxation policies.

Integrated Urban Spatial Planning, Design and Form Integrated Urban Spatial Planning, Design and Form

https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programshttps://www.energy.gov/eere/slsc/property-assessed-clean-energy-programshttps://www.epa.gov/greenpower/community-choice-aggregationhttps://www.bostonmetal.com/moe-technology/https://www.carboncure.com/https://www.carboncure.com/https://sustainability.asu.edu/news/archive/direct-air-capture-co2-engineered-design/https://sustainability.asu.edu/news/archive/direct-air-capture-co2-engineered-design/

15

Catalyzing private sector investments in climate smart cities

SOURCES

Transport Buildings Energy Waste Industry

SOLUTIONS An Integrated Transport Plan that plans for compact cities and multimodal, networked,

electrified, active and green transport

systems: walkability, bikability; e-public

transport (BRT, metro, light rail); e-vehicles

(taxis, share-rides, private vehicles). Policy

measures could consider:

– Increasingly stringent emission

standards for existing cars

– Minimum fuel efficiency standards for

new vehicles

– Quotas for cars that can be registered

– High-occupancy vehicle and bus lanes

– Technology disruption, including self-

driving and small flying vehicles.

An Integrated Systems Plan that promotes

compact, green and efficient buildings

and environment through urban form;

centralized district approaches; building

codes; zoning; appliance standards;

Incentives (permitting, subsidies) and green

infrastructure and nature based solutions

such as trees, parks, green roofs, and water

features to reduce urban heat island effect.

Measures could include:

– Energy efficiency financing for

refurbishment (e.g., Property Assessed

Clean Energy PACE)

– Green mortgages for homes

– Energy performance disclosures for

buildings

– Energy performance labels for buildings

(‘A’ to ‘F’)

– Cap-and-trade program for buildings

An Integrated Energy Plan fed by micro grids,

urban grids and centralized utilities, supported

by storage and renewable energy. Measures

could include incentives for:

– Rooftop solar on city-owned, residential and

commercial assets.

– Rooftop solar for slum upgrades and social

housing.

– Solar street lighting

– Community Choice Aggregation (CCAs)

measures that allow local governments to

procure power on behalf of their residents,

businesses, and municipal accounts from

alternative power sources.

A plan to move towards a circular

economy and zero waste concepts

of “reduce, reuse, recycle (materials),

recover (energy) and only then dispose”

for solid waste and for water. This

includes demand-reduction measures

such as:

– Reducing consumer packaging and

extended producer responsibility;

– Bans on single-use materials (e.g.,

plastic bags);

– Encouragement for multiuse,

recyclable, biodegradable materials

– Pay-as-you-throw or landfill tax;

– Investments in composting and

landfill fugitive emissions capture;

– Storm water diversion through

urban design; incentives for

permeable materials, green roofs,

water gardens, and nature-based

solutions for built environment

A plan to reduce final energy demand in

industry by one-third through renewables,

energy efficiency, and green infrastructure

planning. Increase recycling of materials

and the development of a circular economy

in industry. Measures include:

– Shifting to electrification of production

processes where possible;

– Increasing recycling and circular economy

in industry;

– Substituting towards renewable

materials in high-carbon products (e.g.,

wood vs steel or cement in construction

sector, natural textile fibers vs plastics);

– Investments in green technologies such

molten oxide electrolysis powered by

renewables for greening steel; concrete

for carbon sequestration; direct air

capture technologies

MUNICIPAL CONTROL MEDIUM

Regional and national roads, highways,

bridges, ports, trains under purview of

national department of transport.

Cities have purview over urban planning

and form; in city road network, bus rapid

transit, sidewalks, bicycle and pedestrian

infrastructure, in city transit infrastructure

such as metro, tram or light rail; Taxi and

ride-share policy as well as parking fees and

proportion of urban land dedicated to street

parking and cars.

HIGH

Heating, cooling, and cooking equipment

standards and national building codes

typically under a national department such

as energy, housing or environment.

Cities have purview over urban form,

planning, zoning, building codes, district

cooling and heating, permitting, inspection,

and local financial incentives and financing

approaches such as PACE.

LOW

Utilities and grid networks under purview of

national department of energy.

Although some cities may have municipal owned

and managed utilities this is not the norm.

Typically, cities can make independent decisions

for rooftop solar on city-owned public buildings,

social housing, and slum upgrades; incentives

for solar roof top and upgrade street lighting

Community Choice Aggregation (CCAs)

measures are an attractive option for cities that

want more local control over their electricity

sources, more green power than is offered by

the default utility, and/or lower electricity prices.

HIGH

Cities have purview over solid waste

management through urban planning,

land zoning, waste collection,

infrastructure investment for

composting, landfill, waste to energy,

incineration, and demand reduction

measures (see above).

Cities have medium purview over

water supply, wastewater treatment

and recycling, and storm water

diversion, such as through urban

design and incentives for permeable

materials, green roofs, water gardens

and nature-based solutions for built

environment.

LOW

Industries located within cities must follow

national environmental policies and safety

standards. Trade-sensitive industrial

sectors such as iron, petrochemicals,

and fossil fuels make policy action by

individual cities challenging because of

competitiveness concerns.

Cities have some limited levers of

influence on industry through land zoning,

permitting, and local taxation policies.

Integrated Urban Spatial Planning, Design and Form Integrated Urban Spatial Planning, Design and Form

https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programshttps://www.energy.gov/eere/slsc/property-assessed-clean-energy-programshttps://www.epa.gov/greenpower/community-choice-aggregationhttps://www.bostonmetal.com/moe-technology/https://www.carboncure.com/https://www.carboncure.com/https://sustainability.asu.edu/news/archive/direct-air-capture-co2-engineered-design/https://sustainability.asu.edu/news/archive/direct-air-capture-co2-engineered-design/

16

Chapter 3 | Climate-Smart Cities

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With rapid urbanization, cities are in crisis mode in key sectors that are also the main sources of greenhouse gas emissions

17

Catalyzing private sector investments in climate smart cities

Although cities have increasing needs for low-carbon investments, not all sectors fall within their financing purview, especially utility scale energy and industry. Nevertheless, in all sectors, cities can play a crucial role in pushing their urbanization and infrastructure systems toward sustainable low-carbon pathways. The city can influence private investment by purchasing, investing in and mobilizing capital for low-carbon goods and services as well as implementing policies and regulations that incentivize and prioritize emissions reductions and climate resilience. As highlighted in Table 1, cities can influence or direct private investment toward low carbon, resilient infrastructure through the implementation of standards, land zoning, permitting, taxation policies, or other incentives. One example of such measures includes the Mexico Improving Access to Affordable Housing Project highlighted in box 1.

The main drivers of urban energy consumption include the spatial form and design of the city; the coordination of resident and job densities; the accessibility of jobs, services, and amenities by walking, cycling, and public transportation; and the extent to which the built environment adapts to local climate conditions. The first three factors

directly affect demand for motorized transportation, and the fourth affects operational energy demand of buildings (ESMAO 2014).

Compact city development and sustainable neighborhoods have been presented as models of development patterns that can address climate challenges and long-term resource, economic, and social sustainability. Cities need to steer present resource-intensive urban systems toward resource-efficient urbanization pathways for land, water, waste, transport, and energy demand. Density, land use mix, connectivity, and accessibility are critical determinants of urban form.

In turn, urban form and spatial planning (or lack thereof) are critical determinants of urban energy consumption and GHG emissions. Co-locating high residential densities with high employment densities, coupled with significant public transit improvements, high land-use mixes, and other supportive demand management measures can reduce emissions in the short term and generate even greater emissions savings over time. These mitigation strategies are interrelated and interdependent; pursuing any one of them in isolation is insufficient to lower emissions (IPCC 2014).

In the 2000s, federal housing subsidies in Mexico encouraged developers to build new units where land was cheapest – often areas that were furthest from jobs and services in central cities. While the subsidies provided many households access to quality housing, the poor location increased the time and commuting costs to reach urban areas. The Improving Access to Affordable Housing Project supports the government’s demand side housing subsidy program which links the subsidy amount to the location of the housing unit. Beneficiaries who use the subsidy to purchase housing units that are closer to existing city centers and built-up areas are eligible for greater subsidies than are units located on the urban periphery, which discourages sprawl and congestion. To date, the project has supported more than 10,000 housing units in cities across the country. The project also supports complementary supply-side planning pilots for individual cities to unlock underutilized urban land for new housing. One of these has been completed in Mérida, Yucatan, and has provided a market analysis and financing plan to support new affordable housing in the city.

Box 1 Directing private finance toward housing that supports compact urban design: Improving Access to Affordable Housing Project

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Chapter 3 | Climate-Smart Cities

Thus, integrated spatial planning is an important city-level policy lever to shape urban development choices. It serves as a strategic point of engagement to analyze sources of urban emissions and urban vulnerabilities, identify local capacity to act and avoid carbon lock-in, model long-term implications of policy options and assess costs, benefits, and cost-effectiveness. The greatest opportunities for future urban GHG emission reduction are in rapidly urbanizing areas in developing countries where urban form and infrastructure are not yet locked in.

Urban Adaptation and Resilience

Urban resilience is about a city’s ability to survive, adapt, and grow in the face of a wide range of shocks and stresses, including increasing frequency, intensity and complexity of hydrometeorological and other disaster events, exacerbated by the compounding effects of climate change. Urban resilience is becoming increasingly important as people (55 percent) and economic activity (80 percent of GDP), become more concentrated in cities and increasingly impacted by climate-related and natural hazards. In recent years the world has witnessed an increase in extreme heat, wildfires, air pollution, avalanches, wide-spread loss of wildlife; vector-borne diseases such as malaria and dengue moving into new regions (e.g. now in mountainous regions of Nepal and Bhutan) and droughts as a result of climate change.

7 Refer to footnote 2 for definition of Urban Heat Island Effect.

At the city level, climate-related risks are expected to be very costly to cities and to reduce GDP. Without significant investment in resilience, cities worldwide may face $314 billion a year in damages by 2030 (GFDRR 2015), and this is a low estimate because it does not include the effect of events other than tropical cyclones, earthquakes, tsunamis, and floods, such as social and economic shocks and stresses. Similarly, it has been conservatively estimated that climate-related and natural hazards will cost cities an average of $226.4 billion annually in losses in economic output or GDP.

These threats can also compound one another. For example, unprecedented severe heat waves with temperatures exceeding 50 °C (123.4 °F), as seen in New Delhi, India; Cairo, Egypt; Tokyo, Japan; Paris, France – combined with a lack of preparedness – resulted in the loss of human life, reduced infrastructure performance such as train networks, and reduced economic productivity. Cities are even more vulnerable to heat events due to the urban heat island effect.7

In urban areas, services, people, and systems such as transportation, energy, water, and communications are particularly interconnected, resulting in a co-dependent system that needs to be made resilient to technological, social, economic, political, health and cultural shocks at every link (IFC 2017; GFDRR 2015). Combining grey water infrastructure such as multipurpose reservoirs, flood control structures, and regional water supply networks with green infrastructure (also known as natural capital), such as floodplains, wetlands, mangrove forests, and coral reefs, can reduce disaster risks and protect other critical infrastructure, especially in urban areas. With built-up urban land cover forecasted to more than triple by 2030 (with projections of a seven-fold increase in Africa), it will be critical to continue investments to strengthen climate and disaster resilience.

These mitigation strategies are interrelated and interdependent; pursuing any one of them in isolation is insufficient to lower emissions (IPCC 2014)

19

Catalyzing private sector investments in climate smart cities

As urban populations grow, many cities are sprawling or building over floodplains, forests, and wetlands—putting more people and workers in harm’s way, especially in rapidly growing, under-resourced cities in developing countries that have limited capacity to adapt to climate change (GCA 2019). With more people migrating to urban areas, rising land values often displace the most vulnerable and marginalized populations, forcing them to resettle in the areas most exposed to climate change-related hazards. These settlements are often informal and, in addition to being highly exposed to climate change, they are also not connected to critical services such as water and sanitation, electricity, and transportation. Enhancing cities’ ability to respond to emergencies, support disaster preparedness, deepen financial protection, and finance long-term disaster resilience is critical to sustainable development.

In order to do this, municipal governments must be well-capacitated to coordinate risk-informed planning that identifies and prioritizes critical climate infrastructure and enables cities to reduce and prevent; prepare and respond; and restore and recover from disasters and shocks (GCA 2019). In cities, this goes beyond protecting individual infrastructure assets to ensuring that entire urban systems are resilient. Urban resilience investments include:

– enhancing climate-risk information and technical capacity;

– drawing on topographic and community-level data;

– promoting nature-based solutions for flooding and heat risks;

– upgrading living conditions, especially for people in informal settlements highly vulnerable to climate change;

– investing in resilient infrastructure and systems such as early-warning systems, multimodal transport, local and decentralized power, flexible flood management structures, stricter building standards, and telecommunications networks;

– and integrating urban design and spatial planning that consider extreme weather conditions, reduce displacement of people, and consider interdependencies and synergies across sectors, agencies, levels of government, and communities.

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Chapter 3 | Climate-Smart Cities

As a foundation, integrated climate and disaster risk-informed urban and spatial planning will be crucial to establishing the best strategies and incentives across the three resilience elements. Ensuring that critical systems are resilient involves making the right choices about where and what to build and which assets to upgrade, prioritizing green infrastructure wherever possible, and guaranteeing that infrastructure continues to function even as damage occurs (GCA 2019). Table 2 provides examples of public investments to increase the resilience of cities in terms of prevention, preparedness, and recovery. Priority investments will differ according to location and local climate change related risks and hazards.

Private Sector Investment in Urban Resilience

Unlike mitigation efforts, adaptation and resilience investments have historically struggled to mobilize private investment. Although overall global investment in adaptation had risen 35 percent to $30 billion annually in 2017/2018 from $22 billion in 2015/2016, nearly all of this is from public sources (CPI 2019). Global climate adaptation finance in cities has also been limited, with less than 5 percent of total adaptation finance spent on cities between 2010 and 2014 (GCA2019). Although some forward-thinking companies and investors are seizing opportunities to invest in urban resilience, this is still the exception, especially in developing countries, primarily because pure adaptation- and resilience-type projects are often considered (and structured) as public goods with little or no opportunity to generate near-market-return rates that attract private sector investment. The projects are often focused on averting losses from hazards (e.g., hurricanes) or chronic changes (e.g., drought) associated with climate change rather than generating revenue. They can be complex to value financially (e.g., ecosystem services provided by mangroves and habitat restoration) or to reach payback in the short term, for instance from a 50-year climate event (WBG 2019b). Nevertheless, although most adaptation and resilience financing comes from the public sector, there are opportunities to increase private sector investment.

Climate resilience presents a private investment opportunity and the private sector has an important role to play in terms of reducing, preparing, and responding to disasters and can provide investment, expertise, and innovation. Firms supplying food, products, or services to cities can make their own operations and supply chains more resilient and profitable by investing in adaptation. Data and finance companies can provide climate adaptation services to respond to market needs and can develop and expand insurance products that will provide contingent finance and create incentives for greater resilience.

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Catalyzing private sector investments in climate smart cities

Table 2 Examples of Urban Resilience Investments in Cities According to the Three Elements of Climate Change Adaptation

Integrated Urban Planning, Design and Form

Organize and coordinate

across all units of municipal

and national government.

Establishin clear roles and

responsibilities to reduce

disaster risk.

Maintain data on hazards

and vulnerabilities. Prepare

risk assessments to inform

urban development plans

and decisions. Ensure that

information and city resilience

plans are publicly available and

discussed with public.

Install early-warning and

emergency management

systems and hold regular

public preparedness drills.

Provide education and training

in disaster risk reduction in

schools and communities.

Assign budget for disaster

risk reduction and encourage

homeowners, low-income

families, communities,

businesses, and the public

sector to invest in reducing risks

they face.

Ensure that needs of affected

populations are prioritized,

with their support, to design

and implement responses,

including rebuilding homes and

livelihoods.

As part of disaster

response, put in place

social and economic saftey

nets, unemployment and

underemployment insurance,

paid leave, health insurance,

worker cash payments, fiscal

risk strategies.

Recovery services, including

health and education.

Plan for and trigger emergency

financing such as insurance

and risk finance instruments;

disaster reserve funds; private

property catastrope risk pools;

small business short-term

disaster loans.

Invest and maintain critical

infrastructure that reduces

risk, such as flood drainage,

fire management, energy and

transit systems.

Apply and enforce building

regulations and land use

planning principles that factor

in climate and natural hazard

risk. Identify safe land for low-

income citizens and upgrade

informal settelements where

feasible.

Assess safety of schools, health

facilities, retirement homes,

public housing, and other

public buildings and upgrade as

necessary.

Embed nature-based solutions

into planning and policy,

most effective if deployed

on landscape, ecosystem,

or citywide scale. Protect

ecosystems and natural buffers

to mitigate floods, storm surges,

and other hazards. Invest in

tree cover, green spaces, green

roofs, and permeable surfaces

to increase water retention and

lower heat island effect.

Reduce & Prevent Prepare & Respond Restore & Recover

Source: Adapted from GCA 2019, figure 1.3; IFC 2017, 35; GFDRR 2015, figure 4.3.

22

Chapter 3 | Climate-Smart Cities

Structuring PPP projects to include green spaces that act as water sinks to prevent flooding, or urban parks that charge a fee are some innovative ways to channel private investments into urban resilience measures, which in turn improve the livability and competitiveness of the city. The creative economy8 and sustainable tourism industry can also increase public awareness of and action on climate and resilience needs and support people-centered recovery strategies to restore the physical and social fabrics of cities after a disaster (UNESCO 2018).

The private sector can get ahead of regulatory trends and achieve a first mover advantage. Financial authorities, central banks, and large economic blocs are requiring companies and financial institutions with potentially high exposure to climate risks to conduct routine analysis and disclosure and are moving toward mandatory disclosure of climate risk. The private sector can gain a competitive advantage by anticipating these regulatory trends, mainstreaming climate risk into investment decisions, and embedding resilience in company priorities such as engineering design, research, technology, and innovation.

The private sector’s climate resilience depends on the resilience of the community in which it operates. Business continuity depends on public infrastructure to stay resilient. Breakdowns in transport, communications, water, energy, and health systems can significantly reduce business continuity if workers cannot reach the workplace, suppliers cannot deliver, customers cannot make purchases, or workers are incapacitated because they lack access to health care. Natural hazards cause significant economic and business disruptions that cost households and firms at least $390 billion a year in low- and middle-income countries (WBG 2019b). Investing in and paying for resilience and prevention can help avoid much greater damage and costs in the future, with an overall net benefit of $4.2 trillion over the lifetime of new infrastructure in developing countries alone and a $4

8 The creative economy the refers to infrastructure, resources and processes for the production, distribution, and sale of creative cultural goods such as music, crafts, audio-visual products, theater, cinema, and books in both formal and informal economies.

return for each dollar invested (WBG 2019b). And this calculation is now likely to significantly increase as the global community learns from the experience of the COVID-19 pandemic and its ramifications. Greater incentives and new business models need to be created for the private sector to join the public sector in investing more broadly in resilient infrastructure and systems and nature-based solutions (GCA 2019).

From a pure investment perspective, climate change is an increasingly powerful macroeconomic trend with huge potential. As climate risks increase over time and impact all kinds of investments, the demand for companies that are either intrinsically resilient to natural hazards or that are involved in providing climate resilience solutions should grow. First, investing in existing companies whose technologies and solutions can help build climate resilience tools and scale their solutions as the problem gets bigger can generate extranormal growth for those companies and returns for investors, as well as measurable impact on the climate change problem itself. Second, climate resilience investments are a natural hedge against climate change risk impacting the real economy. The Wall Street Journal called PG&E, a California-based utility provider, the first climate change bankruptcy in January 2019, and BlackRock identified underpriced risk in many assets including coastal real estate (Blackrock 2019). Third, climate resilience investments will be more related to the increasing impact of climate change than, for example, the credit cycle or trade conflict (Kerschberg 2019). The Lightsmith Group, a private equity investor, has identified 20 sectors of the economy representing $130 billion of current market size, that are related to climate change resilience. Those market segments are already growing 20-30 percent per year and will likely grow faster (Kerschberg 2019). According to a recent survey of the world’s biggest companies, climate adaptation products and solutions could result in $236 billion in increased revenue (GCA 2019).

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Catalyzing private sector investments in climate smart cities

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Chapter 3 | Climate-Smart Cities

Table 3 Examples of Private Investment, Expertise and Innovation Categorized According to the Three Elements of Climate Change Adaptation

Integrated Urban Planning, Design and Form

Provide data intelligence and

real-time analytics (cell phone,

software, geospatial and drone

companies).

Increase first responder access

to critical supply chains: key

equipment, medication, trained

staff, emergency buidlings.

Contribute to early warning

systems and social resilience

platforms (e.g., communication

companies; traditional, online,

and social media companies;

the creative economy).

Design and provide insurance

and risk finance instruments.

Encourage investment

in resilient and green

infrastructure through private-

public partnerships, green

public procurement, building

standards.

Provide recovery services,

including health (clinics) and

remote work and education

(online cloud services),

temporary housing in private

real estate (hotels, Airbnb,

rentals).

Invest in resilient Infrastructure:

buildings, built environment,

trunk systems (transit, water,

energy, information and

communications technology).

Mainstream climate risk into

investment decisions and

resilience into workforce staff

incentives and engineering

design, research, technology,

and innovation.

Invest in nature-based

solutions (tourism, agriculture,

land value capture).

Reduce & Prevent Prepare & Respond Restore & Recover

The private sector is increasingly engaging in resilience through innovative financing approaches and business models. Private capital is seeking ways to enable businesses, governments, and households to adapt to climate change. For example, there are opportunities to leverage commercial capabilities, a practice common in risk modeling, disruptive technologies, and insurance that needs to expand to focus on how disasters affect jobs, firms, competitiveness, and critical supply chains. In the

hydrometeorology sector, there is growing interest in PPPs, because the private sector has an important role to play as both producer and consumer of customized and improved weather services. That said it is important that public roles in hydrometeorology services not be compromised, particularly in functions related to enforcing standardized approaches to weather observation and data sharing (WBG 2020). Table 3 provides examples of private sector mobilization for the three elements of resilience.

04

BARRIERS TO EXPANDING CLIMATE-SMART

URBAN INVESTMENT

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Cities face unique challenges in accessing and attracting private capital. Urban climate projects can differ significantly from large-scale national projects; to be successful, all stakeholders must tailor their approach to the unique national context, local capacity, project characteristics, and implementation challenges that can limit the expansion of solutions and increase time and due diligence costs.

There are three things to consider when framing the challenges of mobilizing private investment in urban climate action.

The first is the role of cities as government authorities in mobilizing private investment in urban infrastructure. Many of the barriers cities face in attracting private investment are rooted in their limited control over broader enabling environmental conditions, such as national policies and regulations, and limited institutional capacity to plan and design climate-aligned investment opportunities for the private sector (C40 and ODI 2019).

The second is the role of cities as investors in urban infrastructure. Globally, cities vary widely in their ability to borrow money, with only 5 percent of the 500 largest cities in developing countries with a credit rating on international capital markets and only 20 percent with a credit rating in local markets (World Bank 2018). In addition, 56 percent of countries forbid any kind of borrowing by local governments, excluding them from issuing municipal bonds, and only 16 percent grant any taxation authority to local governments (Coalition for Urban Transitions 2019b, Ivanyna and Shah 2012). Both restrictions limit cities’ ability to raise the capital needed to finance their climate plans.

Cities also have limited direct access to catalytic development finance that could be used to unlock

9 National and international development finance institutions (DFIs) are specialized development banks or subsidiaries set up to support private sector development in developing countries. They are usually majority-owned by national governments and source their capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise large amounts of money on international capital markets and provide financing on very competitive terms. See https://www.oecd.org/development/development-finance-institutions-private-sector-development.htm

private investment. Multilateral and bilateral development finance institutions9 are traditionally oriented to work at the national rather than the municipal level, although they are still an important source of urban climate investment, and climate funds such as the Green Climate Fund, Adaptation Fund, and Global Environment Facility are not directly accessible to cities, which must go through national ministries, where there can be tensions and competing priorities (C40 and ODI 2019).

The third is how cities mobilize capital from private investors. Historically, private and institutional investors have had limited familiarity with financing sustainable infrastructure projects at the municipal level (Blended Finance Taskforce 2018). Some investors may also be subject to financial regulations that prohibit or restrict them from investing in developing countries or in infrastructure anywhere (Blended Finance Taskforce 2018). Although projects may take place at the municipal level, investors are also wary of the risks at the country level, including currency and exchange rate fluctuation, inflation, and political risk (C40 and ODI 2019). Private investors can also find it challenging and time consuming to access blended finance, which could be used to reduce the risks of some of these challenges.

Although urban climate investment projects in developing countries face all these challenges, these challenges are not exclusive to these types of projects. Two interconnected sets of barriers must be overcome to expand private urban climate investment in developing countries. The first set of barriers are traditional project finance challenges, and the second set of barriers is more unique to climate projects. Considering these risks together allows investors and other stakeholders to better understand the complex web of challenges

04 | Barriers to Expanding Climate-Smart Urban Investment

https://www.oecd.org/development/development-finance-institutions-private-sector-development.htm

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Catalyzing private sector investments in climate smart cities

to expanding investment in urban climate projects and how they build on one another. Figure 1 provides a visual stacking of these two sets of investment barriers and their interlinkages.

This section will examine barriers to expanding urban climate investment. The first part of the section will examine traditional investment barriers and how they manifest in urban climate projects; the second part will examine a set of barriers specific to or strongly exacerbated in climate projects. Solutions to these barriers will then be explored in case studies.

Traditional Investment Barriers

This section reviews traditional barriers to private investment and how these barriers manifest in urban projects, summarized in figure 2. There is an additional focus on how these urban project finance barriers are exacerbated in climate-aligned investments as a result of the complexity of climate projects and intricacies of the climate finance architecture. Each barrier impacts the various stakeholders, including cities as both a government authority and as an investor, as well as private investors, involved in urban projects differently.

Figure 1 Private Sector Investment Barriers

Monetizing Resilience

Green Technology

Transaction & Due Diligence Costs

Cost Structure

Commercial

Financing

Policy and Regulatory

Macroeconomic

Project Pipeline

Long-Term Planning

These barriers are more specific to investment in

climate projects, including those at the urban level

These barriers compromise basic project finance

investment risks regardless of sector. Within these traditional

risks, urban climate projects can present unique challenges

Climate Investment

Barriers

Traditional Investment

Barriers

Figure 2 Traditional Investment Barriers

Monetizing Resilience

Green Technology

Transaction & Due Diligence Costs

Cost Structure

Commercial

Financing

Policy and Regulatory

Macroeconomic

Project Pipeline

Long-Term Planning

These barriers are more specific to investment in

climate projects, including those at the urban level

These barriers compromise basic project finance

investment risks regardless of sector. Within these traditional

risks, urban climate projects can present unique challenges

Climate Investment

Barriers

Traditional Investment

Barriers

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Chapter 4 | Barriers to Expanding Climate-Smart Urban Investment

Project Pipeline Barriers

CitiesAs government authority

– Limited capacity to develop bankable6 climate-friendly projects and prepare projects of sufficient size and quality for commercial financing

– Limited capacity to manage diverse stakeholders

– Limited early-stage project preparation financing

Private Investors – Unaccustomed to working with municipal

governments; limited understanding of city projects

– Limited standardization of term sheets for portfolio aggregation to counter project ticket size

A major barrier to private investment in climate action is a limited supply of bankable projects of sufficient quality and size that offer fair risk allocation between public and private capital.

The lack of quality projects is frequently attributed to limited local government capacity for designing and structuring deals that are attractive to private investors, combined with weak project-related contractual frameworks, including international arbitration and currency convertibility provisions. This shortage of internal capacity is especially pronounced in developing country cities. To implement and fund their climate action plans, cities will need to

10 The term “bankable” means that a project has sufficient collateral, future cashflow and probability of success to be accepted for financing by a commercial bank or institutional financing.

11 C40 The Demand for Financing Climate Projects in Cities. Forty-five percent of projects surveyed for investment are less than $10 million.

12 G20 is an international forum for governments and central bank governors of 19 countries and the European Union.

13 See https://www.globalinfrafacility.org/sites/gif/files/GIFBrochure.pdf

significantly increase their capacity to identify, prioritize, and prepare bankable projects and ensure their successful implementation. In addition, climate-related projects often require technical, feasibility, and impact studies which cities struggle to afford because public budgets are tight and cities have limited direct access to external project preparation finance and support.

Even in cases in which urban projects have been well structured, they are often too small for institutional investors11 and come with a high cost of capital as a result of limited concessional finance (C40 2018). Investors, especially larger ones, struggle to justify the transaction costs for small projects, which are often equal to those of larger projects, even if the internal rate of return meets or exceeds their expectations. “Assets such as energy-efficiency investments in buildings and micro power generation are often impractical for traditional large investors to finance. Admittedly, many of these projects receive some form of concessionary capital that should improve risk-adjusted returns, but the complicated processes involved in securing funding from development banks and other investors can create bureaucratic hurdles that slow project preparation and push up transaction costs” (CCFLA 2015).

To help address the critical need for project preparation support and pipeline size, the Global Infrastructure Facility was established in 2014 as a G20 initiative12 to support governments at the national and subnational levels—including cities—and multilateral development banks with funding and hands-on technical expertise to design and structure infrastructure investment opportunities that are attractive to private capital.13 It was designed to address pipeline size through

https://www.globalinfrafacility.org/sites/gif/files/GIFBrochure.pdf

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Catalyzing private sector investments in climate smart cities

standardization, aggregation, and concerted private sector engagement to generate interest in projects.

However, even in cases in which cities have the capacity to prepare bankable projects, private and institutional investors often have limited understanding of cities and their financial conditions and consequently may be reluctant to invest in urban infrastructure, green or otherwise (C40 and ODI 2019). Private investors are also often wary of investing in some of the rapidly evolving climate technologies that cities need to meet their climate action plans. The combination of inexperience with municipal governments and the potential technological risks of new climate technologies can deter private investors from urban climate projects in spite of the multi-trillion-dollar opportunity (IFC 2017).

Case study 1 in the next section of the report describes a dedicated fund that supports cities to build a quality pipeline of projects and then mobilize institutional investment. The International Municipal Investment Fund, which the United Nations Capital Development Fund developed and Meridiam SARL manages, sources projects directly from municipalities. It uses concessional capital to support municipal

governments and developers with project development and preparation, including increasing the sust